Timothy Drinkall, whose Morgan Stanley Frontier Emerging Markets Portfolio (MFMIX) rose 26 percent in the past 12 months, said he bought Argentine shares last year after avoiding the country altogether earlier in 2012. By Dec. 31, the nation’s equities accounted for a larger percentage of holdings than were in the fund’s benchmark index, he said in a Jan. 23 phone interview.
The MSCI Argentina Index of five companies with operations in the South American country has rebounded 16 percent this year following a 39 percent rout in 2012 that was sparked by President Cristina Fernandez de Kirchner’s seizure of the nation’s largest oil company and restriction of imports and capital flows. Fernandez may ease import curbs this year as she seeks to boost economic growth before mid-term congressional elections in October, according to Drinkall.
“Valuations are at extreme low levels,” said Drinkall, whose frontier fund beat 98 percent of peers tracked by Bloomberg during the past 12 months. “Sometimes for a market to adjust upwards, things just have to be less bad.”
The MSCI Argentina (MXAR) gauge, which tracks the U.S.-listed shares of two banks, two oil producers and the nation’s largest telecommunications company, was valued at 1.1 times net assets on Jan. 30, about 30 percent below its four-year average and less than the multiple of 1.5 for the MSCI Frontier Markets Index (MXFM), according to data compiled by Bloomberg. The Argentina measure sank to 0.67 times on Nov. 16, the lowest since March 2009.
Argentine shares had a 3.5 percent weighting in the MSCI frontier index as of Jan. 30, according to data compiled by Bloomberg.
The MSCI Argentina Index was little changed today at 9:37 a.m. in New York trading.
The BlackRock Frontiers Investment Trust Plc (BRFI), which had about $132 million of assets as of Dec. 31, increased its position in Argentine stocks to 3.9 percent of total holdings from 2.4 percent in July, the fund said in a Jan. 16 statement. Sam Vecht, who manages the trust, said by phone on Jan. 18 he’s turning “more positive” on Argentina after valuations fell.
Government controls on imports and currency markets have weakened Argentina’s economy and may be contributing to Fernandez’s declining popularity, said Drinkall, who helps oversee about $300 million in New York. The president has banned the purchase of dollars for savings or real estate investments and forced insurers to repatriate their money held abroad. The peso plunged about 40 percent in the past 12 months in an unregulated foreign-exchange market that Argentines use to acquire dollars.
Fernandez’s approval rating plummeted to 29.8 percent in December from 64.1 percent when she was re-elected in October 2011, according to a poll by Buenos Aires-based Management & Fit. About 2 million demonstrators protested against inflation, crime and currency controls in cities across the country on Nov. 8.
“Her ability to implement some of the negative policies has been curtailed” by her waning popularity, said Drinkall, who traveled to Argentina in December.
The economy may expand between 2 percent to 3 percent this year, up from an estimated rate of less than 1 percent in 2012, helping to boost corporate profits, Drinkall said. He declined to disclose which stocks he bought.
The odds of government meddling in listed companies are still too high to invest in Argentine equities, Thomas Vester Nielsen, who helps oversee more than $250 million in frontier markets as a senior money manager at Lloyd George Management in London, said in a Jan. 14 phone interview.
The U.S.-listed shares of YPF SA (YPFD) have lost about 50 percent of their value during the past 12 months as Fernandez seized control in April, ousting Spanish owner Repsol SA amid a dispute over slumping output and investments.
The cost to protect Argentine government debt against default for five years using credit-default swaps has almost tripled during the past year to about 2,100 basis points, according to data compiled by Bloomberg. That’s the highest among countries tracked by Bloomberg after Greece.
In 2001, Argentina’s $95 billion default sent the stock market tumbling. The MSCI Argentina index fell 22 percent that year and another 51 percent in 2002. It returned 288 percent since then including dividends, compared with a 136 percent rally in the MSCI frontier gauge.
Argentina is “moving in the wrong direction,” Hans-Henrik Skov, who manages the BankInvest New Emerging Markets Equities Fund from Copenhagen, said in a Jan. 15 phone interview. “It will definitely have its rallies from time to time, but I’m comfortable missing out on those.”
Foreign companies’ increased interest in Argentina’s shale fuel deposits may signal easing concern about the risk of doing business in the country, according to Vecht, who manages developing-nation funds at BlackRock, the world’s largest asset manager. YPF (YPF) struck agreements with Chevron Corp. (CVX) and Bridas International in December to develop shale reserves.
“We had been very negative but we’re looking to move in a more positive direction because markets have come off so much,” said Vecht, who’s based in London. “There are obviously severe challenges. But if things were to change, markets could move up quite significantly.”
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